Funding tool can help developers keep PACE up to date with environmental trends

Funding tool can help developers keep PACE up to date with environmental trends

Jamie Thalgott Such projects must be located on qualifying commercial or industrial real property, which may include a residential project comprising five or more dwelling units. A qualified, private capital provider issues the financing, which is then secured by an assessment lien created by a local government and recorded against the participating land.

Some background: In 2017, the Legislature followed a burgeoning national trend to set baseline PACE requirements and grant local governments authority to enact PACE programs. Henderson, Las Vegas and Reno have created such programs and have generally delegated their administration to an outside company, referred to as a “program administrator.”

Ultimately, PACE financing benefits property owners by facilitating access to long-term, fixed-rate and low-cost capital, and benefits the community by encouraging clean and renewable energy improvements.

The local government may establish the boundaries of an area to be assessed for a qualifying project, and certain lienholders and the property owner must execute forms of consent. The lienholder consent should acknowledge the assessment’s creation, its status as an assessment lien and its unique enforcement structure. The owner’s consent must indicate the estimated maximum benefit to the property from the installation. Interested participants should take note of the requirement to sign the construction contract early in the game before moving forward with a plan to include PACE financing in their capital stack.

Once qualified and approved by the program administrator, the local government will create an assessment lien for the amount of the financing and then assign its servicing obligations and enforcement rights and remedies to the capital provider. The government’s primary goal is to ensure it has minimum responsibility and little to no liability associated with the PACE financing. Accordingly, the capital provider will set its own parameters for the loan, in terms of disbursements, interest rate, etc., through a financing agreement to which the local government is a party. Once created, capital providers may find this security enticing, as it is not extinguished in the event of bankruptcy, continues to encumber the property upon a sale or foreclosure, and a delinquent PACE assessment may obtain priority similar to a tax lien upon default.

Owners might also find PACE financing attractive. For new builds, it can complement a traditional construction loan by filling a gap in the capital stack previously filled by a mezzanine loan or preferred equity. Where mezzanine debt is often short-term (three to five years to maturation), relatively high interest (8%-12%) and usually comes with a balloon payment, PACE financing can provide up to 25 years of amortization, generally offers a lower interest rate, and runs with the land upon a sale of the property. For retrofits, PACE financing offers a low-cost option to borrow funds rather than going out-of-pocket to upgrade the property to lower historical energy costs. And for any project, PACE financing offers the added benefits of:

• being non-recourse (though a completion guaranty is often required)

• being capable of pass-through to tenants

• typically having an interest-only period

• lacking acceleration as a lender remedy in the event of default.

The above benefits notwithstanding, the Nevada statutory framework for PACE financing contains various procedural nuances that make its implementation somewhat cumbersome. Thankfully, Senate Bill 283, which passed on a 14-7 vote in the state Senate and 34-7 in the Assembly, will cure some of these issues and broaden the scope of PACE’s applicability to include “water efficiency projects” and “resiliency projects” (i.e., a broad category of improvements with a useful life of at least 10 years, ranging from enhancing the project’s surrounding environment to increasing a building’s structural resiliency for seismic events). The new law will become effective October 1 (but may be used by a local government beforehand, though not retroactively), and thereafter necessitate changes in the local government’s PACE-enabling resolutions and program guides.

Interested parties should keep an eye out for such changes, which will likely be processed through a public hearing on council or commission agenda, with the legislative session having ended.

Jamie Thalgott is a shareholder with the law firm Brownstein Hyatt Farber Schreck.

This story appeared in Las Vegas Weekly.

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